Mumbai: The Securities and Exchange Board of India (Sebi) is considering a proposal to force corporate borrowers to report all defaults above Rs5 crore if repayment is delayed by over 30 days, two people aware of the matter said.
The proposal marks a revival of the regulator’s 4 August order to disclose every default on the first day itself, which was withdrawn later. Sebi also plans to ask banks to disclose frauds they have reported to investigative agencies, the people cited above said on condition of anonymity. The Sebi board is expected to take up the proposals at its meeting on 28 March.
“The earlier criticism was the default disclosure did not consider materiality. So, this draft would consider the threshold as set by the Reserve Bank of India," one of the two people cited above said. On 13 February, RBI asked banks to report defaults on loans above Rs5 crore every week. Following protests from banks, Sebi had withdrawn the order on 30 September, just a day before it was to take effect. The finance ministry last week sought comments from Sebi on default disclosure norms, Bloomberg reported on 23 February.
“When the default disclosure framework is implemented, whenever it happens, it will create some volatility for a few quarters as borrowers adjust to it and investors and rating agencies assess the changes on rating following the disclosures. As on date, the financial discipline of many borrowers towards bank borrowings and debt capital borrowings are at some variance. Once the system is stabilized, we may see banks moving towards a more efficient risk-based pricing than currently," said Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd.
The new proposals come at a time of increased discussion about banking frauds and supervision, following Punjab National Bank’s (PNB) discovery of a fraud that now stands at $2 billion. The size of the fraud is more than double the government’s proposed equity infusion into the lender.
“Sebi’s (default) disclosure norms are very important, even if they need to be tweaked so that every minor issue is not reported as a problem," said Sandeep Parekh, Managing Partner, Finsec Law Advisors. “The default should be material. Not every delay in operational credit to vendors should be reported and there should be a timeline of, say three months, instead of immediately, so that short-term issues can be given a change for course correction. This will cause the right sequencing of disclosure, recognition, and resolution."
Sebi is also considering asking banks to disclose to stock exchanges complaints of fraud made to probe agencies. Typically, when banks refer a case to enforcement agencies, it is a case of fraud, and then the account is classified as non-performing asset. However, these are seldom disclosed to exchanges. In PNB’s case, the disclosure to exchanges was an exception, because it involved fraudulent transactions worth Rs11,400 crore (later increased to Rs12,636 crore).
For instance, Bank of Baroda, which referred a case of fraud against promoters of Rotomac Pens this month, did not initially disclose this to stock exchanges. Similarly, even when a State Bank of India-led consortium filed a case against now defunct Kingfisher Airlines in August 2016, it was not disclosed to exchanges. “A fraud is material information by all standards. So, a listed firm should disclose such information to bourses," the first person said.
Alekh Archana contributed to the story.